These are still pretty conservative investments but offer a higher return than the euro and Danish kroner bonds. Plus this shift shows added concern over the strength of the euro.

I also sold the Hungary bonds in my portfolio and purchased the Polish bond below with the proceeds.

PLN 6.50% EIB 12.08.2014 (AAA) 107.00 4.77% p.a.

There are three main reasons for these shifts.

First I simply had too many euro and Danish kroner in the portfolio without a solid economic foundation. In 2007 and 2008 the euro seemed the least bad place to go.

Second, as the global economy creaks into recovery mode, euro interest rates are lagging behind. This is creating a global monetary policy divergence.

The Reserve Bank of Australia (RBA) recently raised its benchmark interest rate to 3.75%. The divergence comes because economies around the globe are in different monetary cycles. Australian, Norwegian and Canadian economies are picking up so interest rates are beginning to rise. Rates in the Eurozone and US. remain low.

The European Central Bank (ECB) and the Fed have left their base rates unchanged.

This means that right now AUD, CAD and NOR bonds offer better returns.

Later if Euro rates rise, the price of bonds denominated in euro will fall.

Third Greece has problems that are likely to push the euro rate up.

A number of credit-rating agencies have stated that the economic slowdown and the financial crisis have put extra pressure on Greece’s public finances, which were already in a shambles.

These agencies have put Greece on a credit watch and question whether Greece will be able to service its debt obligations.

This will most likely force other euro-zone countries to support Greece

Greek budget deficits have been much higher than expected.

The budget deficit for 2009 was raised to just above 12% against the previous forecast of approx. 6%, and the prospects for the public debt indicate
that it will increase from 100% of GDP today to 130% in the course of the next two years.

The problem for the EU is that of they support Greece, other countries may become more likely to be fiscally be negligent with deficits.

If Greece defaults, this could cause interest rates in the entire euro-zone to rise.
There has never been a default by an EU nation and there is no system in the EU to deal with this… so whatever solution it is likely to be muddled and cause interest rates to rise and the euro to weaken.

I also exited Hungary because the problems in the Hungarian economy (and hence the strength of the florin) are numerous and fundamental.

First, Hungary’s growth trend is basically weak. The median age of Hungary’s population is rising quickly to start. The Hungarian birth rate is low. An increasing portion of the population is over 60. This adds to government obligations and reduces the number of taxpayers to finance that obligation.

Next Hungarian government debt grew out of control beginning in 2005 as domestic consumption weakened. This led to government spending to support the economy.

Supply side government spending does not work in diminishing populations.
Hungary, has a population of 10 million. Three million of that population are pensioners. The Hungarian government also provides benefits to accident victims, the disabled, military and police veterans, mayors, widows, farmers, miners and “excellent and recognized” artists. The average Hungarian retires at 58, and just 14% of Hungarians between 60 and 64 are working, compared with more than half of Americans.

Hungary has run fiscal deficits for years to pay for social programs, and its annual tab for pensions now surpasses 10% of its gross domestic product.

Hungary needs to increase their exports to stimulate its economy. Success in exports requires demand (harder to get right now) and competitiveness, so exchange rates matter. This creates a downwards pressure on the forint.

Hungary’s economy is slowing. Third-quarter GDP contracted by 7.1% year on year in the July-September period compared to the 7.5% fall in Q2 .Quarter on quarter the economy contracted by1.8%, the sixth quarter in a row that the economy has shown negative growth.

Inflation looks stronger. Hungary’s consumer prices rose 5.2% year on year in November, an acceleration from the previous month (4.7%). Month on month prices were up 0.3% . .

Unemployment is rising and reached 9.9% in October.

Hungary’s government deficit in 2010 could be as high as 7-8% of GDP and an election looms ahead.

Poland and the zloty seems to have better conditions at this time.
Poland’s economy grew more than economists forecast last year.

Exports to Germany, Poland’s main trading partner grew.

Poland is east Europe’s biggest economy and it grew 1.7 percent in the three months through September 2010.

Poland is a closed economy, which makes it more reliant on domestic demand, which means that it was more resilient during the recent global economic disturbances.

Poland’s economy did not contract at all during the 2007-2008 economic downturn.e highest since May 2008 and now the global recovery is helping Polish exporters so Poland’s economy is expected to expand about two percent in 2010.

The zloty is showing strength versus the euro and Poland’s central bank has held key interest rates at a record-low 3.5 percent.

Nor are zloty rates expected to rise because inflation is expected to be relatively low in 2010.

Like many other countries one of Poland’s negatives is a growing budget deficit could be more than double the EU ceiling of 3 percent of GDP.

The country’s public debt is also rising and will push past the country’s legal limit of 55 percent of GDP next year. Unless changes are made it could exceed 60 percent in 2011 above the EU’s limit.